| Abstract: |
The paper presents an intertemporal utility model that determines the effects
of elections on the public expenditure composition. Conventional political
budget cycle models describe incumbents as concerned only with the conditions
that guarantee re-appointment. Aiming at achieving re-election, incumbents
behave opportunistically in order to seduce voters about their political
performance. The paper introduces another motivation for the manipulation of
the public expenditure mix near elections: the incumbent’s concern with her
future utility in the case of defeat. We provide data to suggest that both
central and local governments in the European Union do manipulate the budget
composition around election moments. In order to rationalise this observation,
the paper proposes a model where voters and incumbent are rational, have
complete information and no bias towards any category of public expenditure,
namely consumption expenditure or investment expenditure. The paper shows that
even under these extreme conditions, an electorally induced cycle on public
expenditure mix is still expected, one where consumption expenditure raises
relative to investment expenditure in pre-election periods. This opportunistic
budget manipulation follows from two facts. First, any decision an incumbent
makes on consumption expenditure pays back political dividends during the same
period the expenditure is incurred, while any investment expenditure only
becomes visible to voters with a one-period delay. Second, re-election is an
uncertain event, which makes the second state of nature valuable. Outside
politics, the incumbents’ pay back is a direct function of the voters’
assessment of the incumbents’ job while in office. The model is then extended
to accommodate the scenario where voters and society at large do not share
preferences. When voters or society evidence a preference prone to one of the
public expenditure categories, a bias towards such category emerges in
post-election periods. In pre-election periods two cases are found.
Consumption expenditures exceed investment expenditures if either voters or
society prefer the former category at the margin. The cycle’s nature is
ambiguous if the marginal preferences of voters or society are biased towards
investment expenditures. JEL classification: H50, E62. Keywords: Political
Budget Cycles, Public Expenditure, Elections. |